Category: Financial Transactions
Fatwa#: 17460
Asked Country: South Africa

Answered Date: Feb 08,2009

Title: The "CFD", or "Contract for Difference", was developed to allow clients to receive all the benefits of owning a stock without having to physically own the stock itself....

Question

Is the following halal.  I take the view that share trading is permissable.  Please can you clarify if the following is permissable.  I have descibed how it works.  I dont know, please can you get some advice for me.  Will really appreciate it.  I have not trade in any yet.

 The "CFD", or "Contract for Difference", was developed to allow clients to receive all the benefits of owning a stock without having to physically own the stock itself.  For example, instead of purchasing 1,000 shares of Microsoft from a stock broker, a client could instead buy a 10 lots of Microsoft on the CFD trading platform.  A $5 per share rise in the price of Microsoft would confer to the client a $5,000 profit, just as if he had purchased the actual shares that are traded on the exchange.  A major difference is that there are no exchange fees and many of the inefficiencies of trading the underlying shares on the exchange are eliminated.   You can therefore be offered CFDs with zero commissions and very attractive margin requirements.  CFDs have grown in popularity dramatically over the past few years, and we believe that this will increasingly be the preferred way to trade the financial markets.

 The other major benefit of trading a CFD is the fact that the client can trade on margin. CFD trading means clients can trade a full portfolio of Shares, indices, or commodities without having to tie up large amounts of capital. Using the example above, a client purchasing $50,000 worth of CFD Shares will only be asked for $1,000 margin.

 CFD Performance

As with Shares, CFD investors benefit from normal market movements. Clients' open positions are valued in real time, with every tick of the market. Profits or losses similarly are credited to or debited from the clients account equity in real time.

 Margin

Unlike physically purchasing stocks, clients only have to deposit approximately 2% of the value of the Shares. So if you want to buy $50,000 worth of Shares, you only need to have $1,000 on deposit.

 One must bear in mind that should the market collapse you will be liable for the entire amount.

Answer

In the name of Allah, Most Gracious, Most Merciful

Assalaamu `alaykum waRahmatullahi Wabarakatuh

In a ‘Contract for Difference’ (CFD), the client does not become the owner of the shares. In fact, he does not receive any asset or service in exchange for the money he invests. He may gain money or he may have to pay more money (and also lose the initial amount) based on the difference of the value of the shares between the time the CFD contract opens and closes. Therefore, in essence, CFD is tantamount to exchanging fewer amounts of money for more, or vice versa. Such an exchange is not permitted in the Shariah as it falls in the purview of Riba (interest).

CFD trading resembles Qimaar (gambling), in which two people agree that whoever loses the bet on an uncertain outcome, will pay the other a specific amount.[i]

Additionally, interest is applied daily to open CFD contracts by many CFD providers.[ii]

In short, CFD contracts contain elements of interest and gambling, both of which are explicitly prohibited in the Holy Quran. It is therefore, not permissible for a Muslim to trade in CFD.

This is also the opinion of Hazrat Mufti Taqi Uthmani Saheb Maddazillohu inspite of our difference with him on the issue of shares:

“Thus, wherever this scenario exists, that the delivery of the shares does not take place (i.e. the client does not become the owner of the shares), and neither is buying the shares the purpose, nor selling them; instead the purpose is, through wagering, to settle the difference, then this set-up is undoubtedly haraam (prohibited) and impermissible in the Shariah.”[iii]

And Allah knows best

Wassalam u Alaikum

Ml. Faizal Riza,
Student Darul Iftaa

Checked and Approved by:

Mufti Ebrahim Desai
Darul Iftaa



[i]  لأن القمار من القمر الذي يزداد تارة وينقص أخرى ، وسمي القمار قمارا لأن كل واحد من المقامرين ممن يجوز أن يذهب ماله إلى صاحبه ، ويجوز أن يستفيد مال صاحبه وهو حرام بالنص ( رد المحتار: ج 9 ص 665 دار المعرفة )

 

[iii] (Fiqhi Maqalaat vol. 1 pg. 152)

 

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